Tech

No Matter How You Slice It, Google Lost On Motorola

No amount of positive spin can hide the fact that Google's acquisition of Motorola ended in failure.

Almost as soon as soon as the news broke Wednesday that Lenovo was buying Motorola Mobility from Google for $2.9 billion, the rationalizations over the difference between the sale price and the nearly $13 billion Google paid in 2012 started to appear.

The New York Times' "DealBook" has gone as far as to even ask if "Google really lost on its original Motorola deal?" To bolster the claim that the "loss" wasn't that bad, The Times points out that Google sold Motorola Home for $2.4 billion and is keeping most of Motorola's patents. Even taking those factors into account, Google is still losing on the Motorola deal.

Revisionist History

It's easy for "DealBook" to try to sugar-coat the loss with tax incentives (conveniently forgetting that the Motorola division was also losing more than $1 billion a year), but those arguments become less viable when one considers how Google was valuing Motorola in 2011.

When Google bid $40 a share for Motorola Mobility in Aug. 2011, it was paying a 63% premium over the stock's closing price. Moreover, SEC documents revealed that Google increased its bid by 33% during the course of negotiations — even though no other company was bidding on Motorola — adding more than $4 billion to the deal's tally.

At the time, most analysts reasoned that the premium for the company was because of Motorola's patents. There was a lot of discussion at the time about whether or not Google overpaid, and the general consensus was that the extra money was for Motorola's patent portfolio.

I'm seeing some argue that Google's plan all along was to sell-off the mobile unit. If that were true, why did Google bother spending so much time and investment trying to restructure the mobile hardware division?

Rather than selling off Motorola Mobility as soon as the deal closed, Google got to work trying to reorganize the unit. It cut thousands of Motorola jobs and shut down a third of Motorola's facilities.

Google admitted that it was stuck with a lot of product in the Motorola pipeline that that was less than ideal (the revamped Razr for example), but it continued to invest in R&D for new products.

The company poured a good deal of money into the Moto X. Not just on R&D, but on marketing as well.

One could argue that Google didn't focus enough on Motorola to make it a success — or that it never vertically integrated Motorola into Google's in-house hardware and software divisions — but the company's own actions and checkbook show that it spent time and effort trying to do something with the company.

Contrast Google's treatment of Motorola Mobility with the Motorola Home division. Motorola Home made Motorola's set-top boxes and — despite what some of us predicted — that was an area Google had no interest in. Within six months of closing the Motorola acquisition, Google sold Motorola Home for $2.4 billion.

The fact that Motorola Mobility is only worth $500 million more than a set-top division spells out the cold truth: Google tried to make Motorola work, and it failed.

How Much Are the Patents Even Worth?

The only way that even the most generous math can make the Motorola acquisition not a multi-billion dollar loss for Google is if its patents are valued at more than $6 billion.

But let's look at those patents. Yes, there are lots of them, but are they really that valuable? Recent litigation suggests they're not.

In April, a judge in one of the Microsoft v. Motorola patent lawsuits valued the fair, reasonable and non-discriminatory rate (FRAND) rates for a number of Motorola's patents. FRAND rates are how much a patent is licensed for.

In this case, Motorola wanted to charge Microsoft $4 billion a year for its patents related to H.264 video and 802.11 WiFi. Microsoft wanted to pay a lower rate. The judge mediated and determined that Motorola was entitled to $1.8 million in FRAND fees. That's not a typo.

Some Motorola patents have been invalidated and the company has lost in court in other areas. Looking at Motorola's own balance sheet, the patents aren't bringing in anywhere close to this type of value.

History has proven that some patents lose value over time. For example, Palm basically invented the smartphone and had many patents that were deemed vital just a few years ago. Last week, HP off-loaded those patents to Qualcomm. The purchase price for the patents wasn't even disclosed. Which means that it wasn't considered "material," due to what was likely a low overall acquisition cost.

There's no doubt Google gained important patents that it can use to "defend Android" and its other products in the future. The question, however, is: Are those patents worth what the company paid for all of Motorola?

That's impossible to answer, factually, but given the FRAND rates Motorola has obtained, I'm inclined to say no.

Some argue that by simply having possession of those patents, Google has been able to move more OEMs onto Android and not to Windows Phone or other mobile operating systems.

Most of that OEM movement started before the Motorola acquisition. Moreover, we're continuing to see Android OEMs sign licensing deals with the Rockstar Consortium (the group made up of Apple, Microsoft, Nokia and RIM that control Nortel's patents) — which indicates that having the Motorola patents hasn't meant that Android OEMs are free from having to pay licensing fees.

Sometimes You Lose

Let's just call a spade a spade: The Motorola acquisition ended up being a loser. Full stop.

To Google's credit, this is one of the very few examples of the company making a misstep — especially when it comes to acquisitions. Perusing the list of Google acquisitions on Wikipedia, I'm struck by how many have gone on to be fantastic investments.

Buying YouTube for $1.6 billion back in 2006 was a stroke of pure genius. The $3.1 billion acquisition of DoubleClick may be one of the best acquisitions in history because it put Google in the display advertising game. Display ads at Google now account for more than $3 billion in revenue each quarter. In terms of global impact, the $50 million acquisition of Android in 2005 has helped shape Google into one of the most powerful and dominant tech companies in the world. Recent acquisitions of Waze and Nest also look promising.

In fact, Google's successful track-record is part of what makes the abject failure of the Motorola acquisition notable. Google doesn't lose very often.

We can discuss the how's and why's behind the Motorola failure at length — I think there are interesting arguments to be made about business models and corporate integrations — but let's not pretend as if this was a success.

Motorola is the rare Google failure that reminds us that the company is not all-powerful and that, like any other brand, it too can stumble. At best, this deal will be remembered as a way for Google to defend Android in the never-ending saga of patent lawsuit theater. At worst, it will be seen as the murder of a once iconic telecommunications brand.

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